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Are big banks about to get smaller?

The UK banking industry is preparing for a shake-up. The Competition and Markets Authority (CMA) has announced that it will implement a wide-reaching package of reforms over the next two years. The reforms are primarily concerned with increasing competition within the sector so that big banks have to work harder to keep consumers’ business. And this means things are about to become all about the data.  

The authority’s solution to the lack of competition is to require banks to be more transparent with information about customers’ accounts. By equipping consumers with more information, the CMA hopes to help people navigate the complex world of banking, compare different institutions more easily and get the best value deal from their bank.  

The reforms mean that banks will need to sort out exactly how they will access and manage their data. Sharing information across disparate systems is difficult at the best of times. Figuring out how to do this between different financial institutions will be even harder. 

Big banks mean big business

To put things into perspective, banks see a staggering £1.2 billion worth of revenue generated from unarranged overdraft charges each year. And unlike other financial products such as home insurance, bank accounts don’t operate on an annual subscription basis, meaning that people rarely review them after a certain period of time.  

Considering this, it’s clear why the CMA has decided to dismantle the status quo and put some power back into the hands of consumers. In fact, retail banking investigation chair Alasdair Smith has firmly declared that the reforms will “ensure that both personal customers and small businesses get a better deal from their banks”.

What is about to change

The main changes as a result of the reforms include: 

- A new ‘Open Banking’ system, which will allow customers to request that their banks share their personal data securely via an API.    
- A requirement for banks to publicly publish objective and honest information about their quality of service on the company website, as well as in branches.    
- Requiring banks to send out periodic updates and event-based alerts, for example about a closure of a local branch or changes to fees and charges. 

Seizing the power of data

It all sounds simple enough on the surface. But what does it mean for the UK’s financial sector? And how will the big banks adapt to a rapidly evolving landscape that may see the balance of power shifting in favour of challenger banks?  

First off, banks will need to tackle the complex task of accessing data. In the banking sector, and indeed many other industries, data is the crown jewel. It informs business decisions and helps drive the direction of new products and services, while simultaneously allowing for more personalised marketing to customers. But managing the sharing of complicated banking data, not to mention the sheer volume of data that will need to be accessed, will pose a significant challenge. 

Adapt or die?

Agility will play a big part in being able to comply with the new reforms when they are adopted in two years’ time. Bank CIOs would do well to start preparing now. Ninety-two out of the 100 largest banks in the world use mainframes to store and process data, according to analyst firm Gartner. The ability to adapt to the new Open Banking system will rely heavily on whether or not a company has the right staff and technology to access the information stored within the mainframe system, as well as the multitude of different hardware and software platforms across the entire enterprise.  

Ideally, big banks should implement software that allows for easy, fast and accurate access to data, without having to write a completely new set of complex code in order to fetch information from within the system. Taking this approach will mean they can continue to operate business as usual with their existing IT department, and won’t need to employ additional staff purely to fill a mainframe skills gap. This is especially important considering that the process is more complicated than simply extracting the relevant information from the mainframe. Banks will also have to send back updated account information to the correct data source.   

Don’t forget about data security

Requiring banks to share customer data via an API is likely to have raised a few eyebrows on data security. In this day and age when data breaches are a case of ‘when’ not ‘if’, it’s understandable that the industry will be concerned about the robustness of the new API, even in the face of the CMA’s assurance that it will be fully secure. If any breaches occur via the API and the personal information of millions of is exposed, we can be sure that the subsequent accusations won’t stop with the banks themselves.

What’s the bigger picture

Consumers should certainly be celebrating; they are the main beneficiaries of these reforms. Nothing about their day-to-day banking experience will change. They will still be able to log into their regular banking portal, whether that be online or via an app, and see their account information. But now they will be able to take this information and shop around for a better deal. Or even compile all their separate bank accounts from different brands into one central app, to keep track of how they are performing. 

Perhaps it will be those big banks that are able to demonstrate that they are working harder to provide superior deals and services to their customers that will lead the pack after the reforms are implemented. There is certainly an argument to be made that being proactive could soften the blow of the impending increase in competition. Whatever approach the big banks take to addressing the new world order, it is true that the reforms signal a big opportunity for many of the smaller and emerging banks. Needless to say, the next few years will be interesting, and will no doubt throw up some significant opportunities for those people savvy enough to spot the gaps in the market. 

 John Procter, VP EMEA Sales, Rocket Software. (opens in new tab)

Image source: Shutterstock/MaximP

John Procter is VP EMEA Sales, Rocket Software. With, more than 25 years of experience in IT sales, he joined Rocket 10 years ago. Previously, John worked at Landmark Systems, ViaSoft, Relational Technology and Xerox.